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Who does the Business Broker represent?
Any Buyer or Seller should always make certain which end of the deal Broker represents. Any advertisement to which you respond is almost always placed by the Sellers’ Broker or Agent. Never, ever assume anything different.
Why does it make a difference?
When the Broker is not representing you, you must be extremely careful about what you say to him/her that might cause your position to be compromised, in some way. For example, if you are the Buyer and the Broker is representing the Seller, you would never want to make a statement such as, “I’m going to offer $100,000, but I am actually willing to go up to $150,000.” As the Seller’s representative, the Broker would be totally justified and ethically correct in going back to the Seller and telling him/her to decline the first offer, because you know that the Buyer is willing to increase the offer by as much as 50%, in the final analysis.
As the Seller’s representative, the Broker may understand that the Seller is asking $200,000, but is actually willing to take as little as $150,000. But because the Broker represents the Seller and has a fiduciary responsibility to guard the Sellers interests, the Broker is under no obligation, and in fact would be in violation of his agency relationship with the Seller, if he were to say anything to the Buyer that suggests the Seller’s willingness to discount his/her price.
Taking it to the next, logical extension of this thought process, if the Buyer retains a Broker to represent his/her own interests, that Broker is then prevented from saying anything to the Seller or his/her representative about the Buyer’s willingness to increase his/her initial offer, throughout the negotiation. But though it is common practice for residential home Buyers to retain their own Agent, it is relatively rare for a Buyer to retain such representation, in the Business Brokerage field. In most cases, it is most commonly Commercial Buyers who retain us to represent them on the buying side of the Business Brokerage transaction.
Probably a huge reason for the difference is that Residential Real Estate Licensees almost always share their commissions between the Listing or Seller’s Agent, and the Buyers own agent. It is then much more financially feasible for a Buyer to acquire the services of an Agent to represent him/her in the purchase of a home.
In Business Brokerage, the vast majority of Brokers do not share their commissions with a Buyer’s representative. This means that the Buyer must pay the Broker out of his/her own pocket. Banks and the SBA do not recognize a Buyer’s Representative as part of the cost that can be included in the funding of the business acquisition. The Buyer then must pay the Broker completely out of pocket, and many Buyers are strapped for the cash it takes to purchase the business itself, making payment of the Broker at settlement that much more difficult and onerous. Moreover, a given business could be acquired at a specific price because it makes financial sense, where paying a Broker over and above that amount could make that purchase simply less attractive, economically. Unless, of course the Broker is able to get a reduction in price that is lower than the Buyer might negotiate on his/her own.
Frankly, we believe that Brokers who do not share their commissions, do their Seller-clients a tremendous disservice. But that is for another blog post.
When you deal with a Broker, it is imperative that you receive a written statement from him/her that suggests which side of the transaction he/she represents. In our Business Brokerage practice, when we provide a Non-Disclosure Agreement to any Buyer, it clearly states that we represent the Seller. If we work on behalf of the Buyer, we would provide a completely separate document that further defines our relationship, as the Buyer’s representative. Moreover, when we work with the Buyer who is not represented by another Broker, and we officially and legally represent the Seller, we frequently cautioned buyer when it appears that he may be going overboard in disclosing his/her negotiating strategy in a way that might be to his/her disadvantage.
Not all Business Brokers do that. Should they? That is a philosophical argument, perhaps rather than a legal or ethical issue. If the Buyer has been amply warned ahead of time that the Broker represents the Seller, one could make an argument that the Buyer then has the responsibility to safeguard his/her own interests. And frequently, the local or state authorities are no help in this area. This is essentially the case because only about 20% of all of these United States require Business Brokers to be licensed. Therefore, Business Brokers do not have many of the regulatory obligations in their industry, that Real Estate Licensees have in theirs.
One of the key lessons here is not to assume anything! Always know each phase of the transaction and each of the players, getting everything in writing.
(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .
The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)